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SUPREME COURT DOCKET REPORT

Mayer Brown's Supreme Court and Appellate Practice Group distributes a Docket Report whenever the Supreme Court grants certiorari in a case of interest to the business community. We also email the Docket Report to our subscribed members and if you don't already subscribe to the Docket Report and would like to, please click here.

October Term 2010 - January 10, 2011

Late Friday, the Supreme Court granted certiorari in two cases of interest to the business community:


Securities Exchange Act of 1934—Class Certification—Loss Causation

Implementing Section 10(b) of the Securities and Exchange Act of 1934, SEC Rule 10b-5 makes it unlawful for any person, in connection with the purchase or sale of a security, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). A private right of action to enforce Rule 10b-5 has been judicially inferred. The elements of the claim include (1) the plaintiff’s reliance on the alleged misrepresentation or omission and (2) loss causation—meaning that the defendant’s misrepresentation or omission proximately caused the plaintiff’s loss. In a class action, securities-fraud plaintiffs may establish a rebuttable presumption of reliance based on the “fraud on the market” theory, according to which the price of stock in an efficient market reflects publicly available information, including any public material misrepresentations, and an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. 

Late Friday, the Supreme Court granted certiorari in Erica P. John Fund Inc. v. Halliburton Co., No. 09-1403, to decide whether a plaintiff who invokes the fraud-on-the-market presumption of reliance must establish loss causation in order for the securities-fraud suit to be maintained as a class action. The case is important to all publicly traded companies, because it involves the standards for class certification in a securities-fraud action. Unless a dispositive motion is granted, most securities-fraud class actions are settled, and because the settlement value depends on whether a class has been certified (and what that class is), class certification is one of the most critical stages of any securities-fraud case. 

Erica P. John Fund, Inc., the plaintiff below and petitioner in the Supreme Court, filed a putative class action in the Northern District of Texas alleging that Halliburton Company and its CEO, the defendants below and respondents in the Supreme Court, violated Rule 10b-5 by falsifying the company’s financial results and misleading the public about its financial condition with respect to (1) Halliburton’s liability for asbestos claims and the adequacy of its asbestos reserves; (2) the probability of collecting revenue on unapproved claims on fixed-price construction contracts; and (3) the benefits of Halliburton’s merger with another company. The district court denied class certification. It applied the Fifth Circuit’s decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007), which requires plaintiffs “to establish loss causation in order to trigger the fraud-on-the-market presumption” and requires that they do so “at the class certification stage by a preponderance of the evidence.” Id. at 265, 269. The district court ruled that petitioner could not satisfy that requirement. The Fifth Circuit affirmed, relying on Oscar. The Seventh Circuit has taken the opposite view from Oscar in an opinion by Chief Judge Easterbrook. See Schleicher v. Wendt, 618 F.3d 679, 685–87 (7th Cir. 2010).

After petitioner filed a petition for certiorari, the Supreme Court requested the views of the Acting Solicitor General, who took the position that Oscar is wrong and recommended that the Court grant certiorari to resolve the circuit conflict. The Court subsequently granted certiorari.  

Absent extensions, amicus briefs in support of the petitioners will be due on March 1, 2011, and amicus briefs in support of the respondents will be due on March 31, 2011. If you have any questions about the case, please contact Archis Parasharami (+1 202 263 3328) in our Washington, DC office.


First Amendment—Commercial Speech—Use of Medical Data

When pharmacies fill a prescription, they record the name and address of the prescriber, the name and dosage of the drug, and the age and gender of the patient. Pharmacies sell this information to data-collection companies, which compile it into reports detailing individual prescribers’ prescription histories. Pharmaceutical companies then purchase these reports from the data-collection companies and use them to target their marketing efforts to the prescribers most likely to prescribe their drugs. Along with an increasing number of other states, the state of Vermont restricts this practice by banning the sale and use of prescriber-identifiable data for the marketing or promotion of pharmaceutical drugs unless the prescriber consents to the use of the data. Late Friday, the Supreme Court granted certiorari in Sorrell v. IMS Health Inc., No. 10-779, to decide whether Vermont’s prescriber-data law violates the First Amendment. 

In Sorrell, three data-collection companies and PhRMA, the industry association for pharmaceutical researchers and manufacturers, challenged the restriction on the ground that limiting their access to and ability to use prescriber-identifiable data unconstitutionally restricts their free-speech rights. In response, Vermont argued that the law does not implicate the First Amendment because it regulates only commercial activity, not speech. Vermont also argued that, even if the law did regulate speech, it would satisfy the First Amendment because it is narrowly tailored to the state’s substantial interest in protecting medical privacy, controlling prescription-drug costs, and promoting public health. The district court agreed with Vermont and upheld the law, but a divided panel of the Second Circuit reversed. Rejecting the analysis employed in two First Circuit decisions that upheld similar laws in Maine and New Hampshire, the Second Circuit held that Vermont’s restriction on the use of prescriber-identifiable data violates the First Amendment. 

The Second Circuit reasoned that the law restricts the flow of information to prescribers and therefore does not merely regulate commercial activity but infringes upon commercial speech, which is afforded constitutional protection under Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). The court rejected Vermont’s asserted interest in protecting medical privacy because the law applies only to the marketing of pharmaceuticals while permitting the information to be used, without a prescriber’s consent, in numerous other applications, including law enforcement, research, and claims-processing by insurance companies. Because targeted marketing based on prescriber-identifiable data is cost-effective only for brand-name drugs, the court concluded that the true aim of the law was to promote the use of cheaper generic drugs by shielding prescribers from the marketing efforts of brand-name drug manufacturers. Having determined that the promotion of cheaper drugs was the state’s only substantial interest in restricting the use of prescriber-identifiable information, the court held that the law violates two prongs of the Central Hudson test: (1) it does not directly advance the state’s objective but attempts to indirectly influence the prescribing conduct of doctors by restricting the speech of others; and (2) less restrictive means are available to achieve that goal, such as promoting and/or mandating the use of generic drugs.

While defending the Second Circuit’s decision on the merits, both the data-collection companies and PhRMA agreed with Vermont that the Supreme Court should grant certiorari to resolve the conflict between the First Circuit and the Second Circuit. The plaintiff-respondents’ decision to acquiesce in the state’s request for Supreme Court review—a rarity in Supreme Court practice—reflects the obvious importance of the issue to data-collection companies, the pharmaceutical industry, and any other businesses potentially affected by legislative and administrative efforts to limit the transfer of various forms of data. 

Absent extensions, amicus briefs in support of the petitioners will be due on March 1, 2011, and amicus briefs in support of the respondents will be due on March 31, 2011. If you have any questions about the case, please contact Andrew Tauber (+1 202 263 3324) in our Washington, DC office.


Mayer Brown's Supreme Court & Appellate practice distributes a Docket Report whenever the Supreme Court grants certiorari in a case of interest to the business community and distributes a Docket Report-Decision Alert whenever the Court decides such a case. We hope you find the Docket Reports and Decision Alerts useful, and welcome feedback on them (which should be addressed to Andrew Tauber, their general editor, at atauber@mayerbrown.com or +1 202 263 3324).

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Mayer Brown's Supreme Court & Appellate practice distributes a Docket Report whenever the Supreme Court grants certiorari in a case of interest to the business community and distributes a Docket Report-Decision Alert whenever the Court decides such a case. We hope you find the Docket Reports and Decision Alerts useful, and welcome feedback on them (which should be addressed to Andrew Tauber, their general editor, at atauber@mayerbrown.com or +1 202 263 3324).

Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed. 



 
 
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